2025 (8) TMI 1423 - AT - Income Tax

Assessee's s.11 exemption allowed where cheques honoured after two months 13 days; drawer need not have funds at issuance

Salzer Educational Medical Research Trust Versus ACIT (Exemption) Coimbatore.

Salzer Educational Medical Research Trust Versus ACIT (Exemption) Coimbatore. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether a donation evidenced by cheques issued in the relevant assessment year but encashed after more than two months can be disallowed for deduction under section 11 solely because the drawer's bank account lacked sufficient balance on the date of cheque issuance. 2. Whether the lapse of 2 months and 13 days between cheque issuance and encashment, within the statutory validity of a cheque, justifies treating the donation as not applied in the relevant year for purposes of section 11. 3. Whether absence of evidence that the donee treated the amount as corpus or any other characterization by the donee affects the assessee's entitlement to deduction where the cheques were ultimately honoured. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sufficiency of drawer's bank balance at cheque issuance vis-à-vis entitlement to deduction under section 11 Legal framework: Deduction under section 11 requires application of income for charitable purposes in the relevant year. Payments by cheque are recognised modes of application; cheque validity under prevailing banking rules is three months from issuance. Precedent Treatment: No binding precedent was cited by the authorities in the judgment; the Court relied on statutory/ banking practice regarding cheque validity and on the fact of eventual honour of the cheques. Interpretation and reasoning: The Tribunal held that it is not a condition precedent for validity of a cheque (for purposes of proving application of funds) that the drawer have sufficient balance on the date of issuance. The material requirement is that the cheque is ultimately presented and honoured. The assessee produced copies of cheques dated within the assessment year and the bank honoured those cheques when presented. Ratio vs. Obiter: Ratio - A donation evidenced by cheques issued in the relevant year and ultimately honoured on presentation qualifies as application of income for the purposes of section 11 even if the drawer's account lacked sufficient funds on the date of issuance; sufficiency of funds is required at encashment, not at issuance. Obiter - Observations on the drawer's motive or use of fixed deposits to earn interest pending encashment were discussed but not essential to the decision. Conclusions: The Tribunal concluded that the AO's disallowance solely on the ground of insufficient balance at issuance was unjustified and directed acceptance of the donation for deduction purposes. Issue 2: Effect of delay (2 months and 13 days) in encashment within cheque validity period on application of funds Legal framework: Cheque validity as per banking rules is three months; timing of encashment within validity is permissible. For application of income, the relevant inquiry is whether funds were applied to charitable purpose in the relevant year, evidenced by proper instruments. Precedent Treatment: No contrary authority was relied upon by the Revenue to treat delayed encashment within validity as fatal to section 11 claim. Interpretation and reasoning: The Tribunal emphasised that the delay of 2 months and 13 days falls within the three-month validity period for cheques. The donee's eventual presentation and the bank's honour of the cheques established that the amounts were paid. Absent evidence that the cheques were not issued in the relevant year, mere delay in encashment does not negate application in that year. Ratio vs. Obiter: Ratio - A delay in encashment within the statutory cheque validity period does not, by itself, defeat the assessee's claim for deduction under section 11 where cheques were issued in the relevant year and subsequently honoured. Obiter - Comments rejecting the Revenue's contention that the assessee sought to retain interest on fixed deposits until maturity were explanatory and non-decisive given lack of contrary evidence. Conclusions: The Tribunal found delay insufficient to deny deduction and directed the assessing authority to accept the claimed application. Issue 3: Requirement of proof regarding donee's treatment of the donation (corpus vs application) Legal framework: Deduction under section 11 depends on application of income to charitable purposes; the donee's accounting treatment may be relevant where questioned. Precedent Treatment: The record contains no finding or precedent holding that absence of explicit donee treatment documentation is fatal where the donor proves payment by honoured cheque. Interpretation and reasoning: The Tribunal noted that the Revenue suggested lack of proof that the donee did not treat the amount as corpus, but observed that the assessee's representative did not pursue or raise this issue and no evidence was adduced to show improper treatment by the donee. Given the cheques were issued in the relevant year and honoured on presentation, and no contrary evidence was produced regarding the donee's treatment, the point was not a basis for disallowance. Ratio vs. Obiter: Obiter - The observation that the donee's characterization was not challenged by the assessee's advocate and no evidence against the genuineness of donation existed is factual and supportive but not the key legal basis. Ratio - Where payment is proved by honoured cheques and no contrary evidence exists regarding donee-treatment, absence of specific proof of donee's non-corpus treatment does not negate donor's entitlement to deduction. Conclusions: No deduction denial was warranted on the ground of uncertain donee treatment in the absence of adverse evidence; the claimed donation must be accepted. Cross-references and Overall Conclusion All issues converge to the Tribunal's principal finding: cheques issued in the relevant year and subsequently honoured when presented constitute application of funds for charitable purposes for the purposes of section 11 notwithstanding temporary insufficiency of the drawer's bank balance at issuance or delay in encashment within the three-month validity period. The Tribunal directed the assessing authority to accept the donation of Rs.107 lakhs and allowed the appeal.